Recession Horror Story, As Told By A 3rd Grader

My grandmother taught elementary school for 29 years. In May of 1989 one of her third graders published a short story in the school newspaper titled "If Money Grew on Trees." The tale illustrates the havoc wreaked upon a town by an evil witch, a spooky schoolyard ghost story perfect for the week of Halloween. And as our nation stands at the crossroads of two distinct ideological trajectories, it seems all the more appropriate to share it now.

"If money did grow on trees the world would be very dull. Just think, no one would want to work because everybody would have lots of money.

Well one day this happened. It was at the town of Witchville. It was an ordinary day when all of a sudden there came a terrible storm. A witch made a spell in the rain. She was a mean, wicked witch. For the town's people this was mysterious.

The next day they discovered the money trees, and went right away to buy toys. The toy makers had quit, because they had their own money trees. The people went to buy colorful paintings, but the painters had quit too.

All that was left was money on the trees. There was nothing to buy because everybody was lazy.

Years went by. The old paintings were turning black and white. The people no longer wanted money to grow on trees. They knew this was the work of a bad witch. They went to fight her so the town would be normal again. They finally killed the witch, and the town became normal again.

So you see, the world is better when you have to work for your money."

For a nine-year-old to recognize the inverse relationship between money supply and the purchasing power of money is impressive. That the author then uses the worthless currency of Witchville as a proxy to demonstrate the crucial role of economic incentives in the production process is remarkable. The fable's lesson might be summarized as follows: increase the money supply to the point where money is effectively worthless and there will be no incentive for economic agents to produce, assuming that money is the only possible medium of exchange and transferring value by other means such as a direct barter system is impossible.

More generally, economic expansion, the generation and proliferation of wealth, is fundamentally dependent on drawing investable capital into production. But capital is exposed to risk only to the extent that that risk is offset by potential gains. To disincentivize production by artificially limiting potential returns, or to remove incentives altogether as in the story above, keeps private capital on the sidelines, stifling production and innovation. As such, to further disincentivize the deployment of capital on an institutional level can only prolong a period of economic malaise, despite the best intentions of those calling the shots.

Or the worst intentions should your town find itself under the control of an evil witch.

As a member of the Forbes Wealth team, I've spent countless hours poring over the SEC filings and public records of the billionaires of the Forbes 400. I've valued private companies from gypsum producers to the world's largest restaurant chain and interviewed some of Americ...